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Subway Gains Control of $600M Advertising Trust

MILFORD, Conn. – Subway president Fred DeLuca scored a big victory this month regaining control of the Subway Franchisee Advertising Fund Trust (SFAFT), after four years of disputes and litigation with the franchisee trustees.

In the case, Jeffrey Offutt, Trustee v. Doctor’s Associates, Inc., a federal judge issued his written decision that the parent company has the right to make changes to its franchise agreements in a manner that enables it to divert funds from the SFAFT and direct them into a new advertising trust fund. In his May 4 order, Judge Alvin W. Thompson affirmed his oral decision made on December 21, stating that the settlement agreement now reached among the parties was “fair, just and reasonable under the facts, relevant law and other circumstances of the case.” 

But the settlement appears to be a far cry from what franchisees hoped for when they filed their complaint against Subway’s parent company in March 2007. In the lawsuit, SFAFT trustees alleged that DAI was making unlawful changes to its 2006 franchise agreement in breach of the trust agreement, requiring Subway franchisees to pay advertising contributions to DAI, not to SFAFT.  They stated, “If this controversy is not resolved, SFAFT may be deprived of all or most of its funding, thereby thwarting the unambiguous intent and purpose of the Trust Agreement, and preventing SFAFT from performing the functions for which it was created, and fulfilling its fiduciary obligations to its beneficiaries, the Subway franchisees.”

As part of the legal action, DAI brought individual personal lawsuits against each member of the SFAFT board of directors, all who serve as volunteers. Now as part of the settlement agreement, those lawsuits are dropped. 

Today there is in excess of $600 million a year that passes through the advertising fund, for which franchisees pay 4.5 percent of their gross sales. The settlement affects Subway franchise owners worldwide.

Edward Wood “Jack” Dunham of Wiggin & Dana, representing Doctor’s Associates, expressed his delight with the settlement stating, “This is good news for the system and for the franchisees in particular because, unfortunately, the relationship had gotten a little disharmonious.” He thinks this now clarifies the proper role of the franchisor in the advertising of the brand. He said it also preserves a very significant role for the franchisees under a new name, that the trustees are going to largely function as they did previously. Dunham added, “One thing that should be clear here is that DAI in general and Fred DeLuca in particular really value and wanted to keep franchisee input into advertising.” When asked if the franchisees would be acting as advisors, Dunham said, “I don’t want to characterize it. The documents speak for themselves and the documents describe what role they will have.”

The SFAFT trustees chose not to appeal the court ruling, determined that an appeal would create confusion, chaos and turmoil in the Subway system. They also felt it would cause advertising contributions to be divided and spent in inefficient and conflicting ways, and cause a decrease in revenues and profits of the stores of the trust beneficiaries.

The settlement agreement calls for resolution of all disputes between the parties, calling for the court to dismiss each of the trustee plaintiffs’ claims and each of DAI’s counterclaims with prejudice. It also calls for a transition of the operation, management and administration of SFAFT and its affiliated entities to new trustees and directors appointed by DAI.

Lee Abrams of Mayer Brown, representing the SFAFT plaintiffs, did not wish to make comment other than to explain the settlement: “The previous franchisee elected trustees resigned after they amended the trust agreement to provide that going forward the trustees would be appointed by Doctor's Associates. The former trustees became the newly constituted advisory board, so that franchisee advertising contributions are still being paid to the trust, but the trust is now being run by DAI.” Abrams said the three newly appointed trustees are Cynthia M. Eadie, assistant vice president, David S. Worroll, chief financial officer, and William J. Schettini, chief marketing officer.  

Should SFAFT trustees elect not to be on the newly formed advisory board, DAI and the new trustees are responsible for selecting new franchisees for the positions. The advisory board will determine what their responsibilities will be and govern their conduct through the board’s policies and procedures manual.

Subway founder and president Fred DeLuca and SFAFT board chair Ray Burrows made the announcement of the settlement earlier this month in a letter to franchisees. In closing they stated,

SFAFT and DAI have been working together on a plan to transition the administration of advertising funds under one global Subway advertising organization that will integrate the work of the company and the ad fund boards together, as one team, to build franchisee sales and profits. You should not experience any interruption in advertising support during this transition.

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Subway Settlement Agreement.pdf6.59 MB
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